NEW YORK ( TheStreet) -- Retail M&A is back in vogue.

The private-equity bids for J.Crew ( JCG), Gymboree and Jo-Ann Stores ( JAS) have triggered bullish sentiment in the sector, with speculation arising of other possible deals.

>>Retail M&A: 18 Possible Deals in 2011

Corporate deal making hit a six-year low in 2009 and just started to regain its footing in late 2010. Now Morningstar foresees a significant uptick in blockbuster deals in 2011.

Leveraged buyout will be one of the biggest themes, as private equity firms look to use dry powder before capital commitments expire. According to Preqin, a market research firm, private equity managers have over $400 billion at their disposal to invest in acquisitions, with around half of that being in the U.S. market.

A good chunk of acquisitions are also expected to occur overseas, as domestic companies look to establish themselves in emerging markets.

Retailers, in particular, have spent the recession deleveraging their balance sheets and hoarding cash. For many companies the mantra became "cash is king," and now they are looking to put that cash to work via acquisitions.

Almost every publicly traded retailer under $5 billion in market capitalization has been subject to private equity rumors. Retailers generally meet the typical leveraged buyout target portfolio of strong free cash flow generation and manageable debt obligations.

But given restrictive debt markets and steep equity retirements, Morningstar does not foresee many transactions larger than $5 billion being consummated in the near future, which limits the pool of takeover candidates.

While Wall Street is anxious not to miss the next big M&A targets, Morningstar advises not to be too quick with buying into a stock based on takeover rumors.

"M&A chatter is prompting talk about some combinations that we believe would be risky and potentially destructive to shareholder value," the firm said in a report.

As a result, Morningstar analyzed the takeover potential of companies across industries to weed out those deals that are highly unlikely. The firm assessed the companies in its consumer cyclical and defensive coverage universe for their attractiveness as takeover targets using four categories: size, capital structure, cash flow potential and management's willingness to consummate a deal or potential barriers preventing a takeover (such as an unfavorable ownership structures). In instances where it is strongly suspected that management may be exploring the sale of a company, Morningstar put additional weight behind its final takeover criterion, bringing many rumored candidates to the top of its prospective takeover list.

While Morningstar doesn't expect every name on the list to amount to a deal, it notes that "we believe the names on our lists generally exhibit characteristics of typical takeover target in each industry."

Read on to see which retailer is the most likely buyout target in 2011....

6. Williams-Sonoma

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Williams-Sonoma's ( WSM) streamlined cost structure, lack of debt and well-positioned brands could make it a potential buyout target, according to Morningstar.

In April, shares of the home goods retailer hit a two-year high on renewed rumors that the company could be acquired.

Williams-Sonoma recently upped its fourth-quarter outlook and has been topping Wall Street's forecasts for six consecutive quarters. The company is looking for earnings of between 96 cents and 98 cents a share.

5. Carter's

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Children's apparel maker, Carter's ( CRI), is a prime takeover target given its attractive valuation, healthy balance sheet, and well-established history with PE firms. Berkshire Partners also increased its interest in the company in 2010.

Following the acquisition of Gymboree, Carter's became lumped in with other children's retailers as an M&A candidate.

Galt Investment Partner wrote a letter to the Children's Place ( PLCE) in November saying that while overall it's pleased with the performance of the company, it is concerned that the board is missing "significant opportunities to generate shareholder value, including through a value-maximizing business combination transaction."

In the letter Galt recommended merging with either Gymboree or Carter's, saying that a merger of any combination of the three could result in savings of $50 million or more annually.

4. Barnes & Noble

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Barnes & Noble ( BKS) put itself up for sale last summer, making a deal in 2011 more likely.

But the book selling giant faces significant competition in the digital market and headwinds for the book industry remain a deep-rooted concern for investors.

Hedge fund owner William Ackman said in December that his Pershing Square Capital was prepared to offer a Borders-backed bid for Barnes & Noble of about $16 per share. "But we think that investors who stuck with the stock last year may be unwilling to settle for this price," according to Morningstar.

The first believes a more reasonable takeout range is $16 to $21 a share.

A Borders bid for Barnes & Noble has lost credibility, however, after the company warned that it could face a liquidity shortfall early in the year and as a result is delaying payments to publishers.

>>The Borders Story: Is This The Final Chapter?

Barnes & Noble's chairman and largest shareholder, Leonard Riggio, previously said that he would consider teaming with a group of investors to make a bid on the company that he took public in 1993.

Activist investor, Ron Burkle, who waged an unsuccessful proxy battle against Barnes & Noble, was also believed to be eyeing the No.1 book seller.

3. BJ's Wholesale

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BJ's Wholesale ( BJ) has been on the M&A radar since mid-2010, when Leonard Green upped its stake in the discounter.

The private-equity firm now holds a 9.5% stake in the company, and rumors continue to swirl that it could attempt a hostile bid.

BJ's is currently reviewing strategic alternatives for the company, and Morningstar says that an LBO makes sense given the company's limited debt and solid cash flow generation.

In early January, BJ's announced several overhauls that analysts speculated could be strategic in nature. The company said it will shutter five underperforming warehouse clubs and restructure its headquarters and some field operations, and announced the departure of several top executives.

Morningstar estimates that the takeout value of BJ's could be as high as $55 a share.

This isn't the first time takeover chatter has emerged for BJ's. The rumors first surfaced back in 2007, following the resignation of its CEO Mike Wedge.

2. Office Depot

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Office Depot takeover has a high probability given Bain Capital's investment and recent SEC filings regarding retention payment and a change in control agreements, according to Morningstar.

At the end of 2010, the office supply retailer entered into a new change-in-control agreement with CFO Michael Newman; President of International Charles Brown; and Steven Schmidt, president, North American business solutions; in order to "diminish the potential distraction due to personal uncertainties and risks that inevitably arise when a change of control is threatened or pending."

As part of the agreement, the three executives are guaranteed employment for a year after a change of control, paying them 12 times their highest monthly salary, plus a bonus equal to the highest received in the prior three years. If they decide to leave, they will get their accrued salary and bonus, plus two times their base salary.

This closely followed another filing that outlined the chief financial officer's retention agreement, which provided for the immediate vesting of his two-year retention payout if his employment was terminated for a reason other than cause.

"Our LBO scenario analysis presumes that a potential buyer would use more aggressive operating assumptions, including annual top-line growth of about 3% and operating margins averaging 2.5% over the next decade ,to come up with an acquisition price well above what we commit to in our base case model," according to the report.

Morningstar estimates that a takeover of Office Depot could be about $7 to $8 a share.

1. American Eagle Outfitters

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American Eagle Outfitters ( AEO) is the most likely takeover target in 2011, according to Morningstar.

"American Eagle fits a typical leveraged buyout candidate profile, given a debt-free balance sheet and strong cash flow characteristics," according to the report.

While the teen retailer has reported weak sales in recent months due to aggressive price cuts in the space, especially from rival Abercrombie & Fitch ( ANF), Morningstar believes current sourcing initiatives, better inventory management and a gradual improvement in teen unemployment can lift results in the near term.

American Eagle is also expected to benefit from growth at its aerie lingerie concept, as well as international expansion.

Rumors that a private equity buyout is nearing were ignited when American Eagle decided to cancel its presentation at the annual ICR Conference.

Wall Street has also speculated that Abercrombie & Fitch and Aerospostale ( ARO) are being eyed by private equity.

--Written by Jeanine Poggi in New York.

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